A mortgage works like other loans: a lender provides you with a sum of money, and you agree to repay it over time with interest. What sets mortgages apart is that they often include additional costs, like property taxes and homeowner’s insurance, rolled into your monthly payment. Unlike other loans, which are usually measured in months or a few years, mortgage terms are typically measured in decades.

What is included in a mortgage payment?

When you make your monthly mortgage payment, here’s where the money goes: 

• Principal balance – This is the initial principal—the original amount of your loan. Over time, as your mortgage balance decreases, a larger portion of your monthly payment goes toward paying down the principal, while less goes toward interest.
• Interest – the cost your lender charges for the loan. Early in your mortgage, most of your monthly payment goes toward paying interest rather than the principal.
• Property Tax – Your annual property taxes are divided into monthly payments and placed in an escrow account managed by your lender. When the taxes are due, the lender pays them directly from this account.
• Home Insurance – Like property taxes, your annual homeowner’s insurance premium is divided into monthly payments, held in escrow, and paid by your lender when the bill comes due.
• PMI & HOA – If you have private mortgage insurance (PMI) or pay monthly homeowners association (HOA) fees, these costs can also be included in your monthly mortgage payment.